The extent of speculators' short bets in sugar derivatives, plus
potential price boosts from ethanol, the Brazilian real and Indian setbacks, prompted
Macquarie to offer solace to sugar bulls even as futures renewed their decline.

However, it cautioned that there were factors, "that warrant
close inspection… which could provide bullish surprises" to prices, which fell
to 17.87 cents a pound in New York two weeks ago, the lowest, on a front
contract basis, since August 2010.

Macquarie analyst Kona Haque said: "It is always slightly
worrying when everyone is of the same view," that prices will trend lower.

Market floor?

One potential stimulus for higher prices is the record net short position, of 57,000 contracts, which managed money, a proxy for
speculators, has built up in New York raw sugar futures and options.

"As futures prices start to fall lower to 17 cents a pound,
as we expect into mid-year, then funds may find themselves unwilling to
maintain further short exposure," Ms Haque said.

The market is "expecting Brazilian mills to switch to
ethanol production, should prices hover at the 17 cents-a-pound mark for too
long, and it is also aware that these prices are likely to deter most producers
around the world from investing in further expansion".

At such low prices, "risks are more likely to be on the
upside, rather than downside – and funds may want to start covering their
shorts", a shift which would support prices.

Brazil, India factors

On fundamentals, Indian output could disappoint undermined
in 2012-13 by the impact of drought in some regions, and next season by a
change by farmers to growing alternative crops.

"Despite another decent hike in the statutory cane prices,
farmers in Maharashtra, Karnataka and Tamil Nadu could lower plantings or
switch to other crops," Ms Haque said.

And Brazil could provide support by a strengthening of the
real, which would make the country's exports more expensive in dollar terms,
besides by a change by mills to turning cane into ethanol rather than
sweeteners.

Macquarie said it saw Brazil's mills turning 54% of cane
into ethanol, compared with a little over 50% in 2012-13, to provide biofuel
for domestic mandates for blending into gasoline, and ship to the US, besides being
encouraged by port delays to switch from sugar, of which a greater proportion
is exported.

Prices fall

However, the comments failed to prevent investors selling
sugar anew, sending the March contract 1.5% lower to 17.97 cents a pound in
late deals, and the better-traded May lot down 0.6% to 18.05 cents a pound.

"A third consecutive global market surplus of sizeable
proportion is expected to weigh on prices this year," the bank said, restating
estimates of a surplus of 8.5m tonnes this season and 5.6m tonnes in 2013-14,
on a September to October basis.